The Basel Committee on Banking Supervision has published its second report on banking book risk-weighted assets (RWA) variation. The first report, published in 2013, focused on probability of default (PD) and loss-given-default (LGD) estimates for sovereign, bank and corporate exposures.
The latest report assesses regulatory outcomes by examining variability in the calculation of banking book RWAs among banks that have adopted the internal ratings-based models (IRB) approach for credit risk. It focuses on two aspects: RWA variability in retail and small and medium-sized enterprise (SME) banking book portfolios; and variability in estimates of exposure at the time of default across the entire banking book.
The report also describes sound practices relating to banks’ independent model validation functions. These practices apply to the governance, methodology and scope of banks’ validation functions, as well as to the role of validation across different phases of model development and implementation.